AJ Bell funds – update to underlying holdings

Writer,

One of our most important tasks, when managing the AJ Bell funds, is staying on top of the marketplace. We're always looking for investments that can help deliver the AJ Bell funds' objectives and risk outcomes, while satisfying the team's mantra of 'simple, low cost and transparent'.

 

With that in mind, we wanted to tell you about two changes we’ve made to the AJ Bell funds’ underlying holdings. We’ve changed the investment that provides our exposure to the following asset classes:

  1. UK corporate bonds – switched from iShares Core GBP Corporate Bond UCITS ETF to Invesco GBP Corporate Bond UCITS ETF
  2. Global high yield bonds (£ hedged) – switched from iShares Global High Yield Corporate Bond UCITS ETF to JP Morgan Global High Yield Corporate Bond Multi-Factor UCITS ETF

Why we changed our UK corporate bond holding

Five of our AJ Bell funds are exposed to UK corporate bonds: the Cautious, Moderately Cautious, Balanced and Moderately Adventurous funds. Previously we used the iShares Core GBP Corporate Bond UCITS ETF to achieve this exposure – an ETF priced at 0.20%.

For a while now, we’ve considered UK corporate bond ETFs as something of an outlier in price terms, not benefiting from the ongoing price drops seen with other asset classes. This was due to a narrow market offering for UK investors, who had only six UK corporate bond ETFs to choose from:

Provider Ticker Fund Name OCF Index Tracked AUM (£m)
iShares SLXX LN Equity iShares Core GBP Corp Bond UCITS ETF 0.20% Markit  iBoxx GBP Liquid  Corporates Large Cap TRI Index 1,963
iShares ISXF LN Equity iShares GBP Corp Bond ex-Financials UCITS ETF 0.20% IBOXX Sterling Non-Financials Overall Total Return Index 233
iShares ERNS LN Equity iShares GBP Ultrashort Bond UCITS ETF 0.09% Markit iBoxx GBP Liquid Investment Grade Ultrashort Index TRI 576
SPDR UKCO LN Equity SPDR Bloomberg Barclays Sterling Corporate Bond UCITS ETF 0.20% Bloomberg Barclays Sterling Corporate TR Value Unhedged GBP 221
SPDR SUKC LN Equity SPDR Bloomberg Barclays 0-5 Year Sterling Corporate Bond UCITS ETF 0.20% Bloomberg Barclays GBP Corporate 0-5 Year Total Return Index Value Unhedged GBP 165
Lyxor COUK LN Equity Lyxor iBoxx GBP Liquid Corporates Long Dated UCITS ETF 0.09% Markit iBoxx GBP Liquid Corporates Long Dated Mid Price TCA TRI 94

Source: AJ Bell, Bloomberg - 31 December 2019

The Ongoing Charge Figure (OCF) represents the recurring fees incurred in running the ETF, and includes fees paid to the ETF manager. As you can see, 0.20% was the market’s established pricing level for this asset class – the cheaper products either target shorter-dated bonds, or use complex financial instruments to achieve their exposure, such as the Lyxor ETF. Since at AJ Bell Investments we focus on simple easy-to-understand products, we ruled out the Lyxor product.

This lack of choice meant that OCFs for this asset class have remained higher than we believe was warranted. To remedy this, we’ve actively engaged with several providers with a view to launching alternative ETFs to improve the breadth and choice available. It was pleasing then, as a result of this work, to see Invesco come to the fore as a provider willing to launch a new UK corporate bond product, and at a market-leading price point of 0.10%.

The Invesco GBP Corporate Bond UCITS ETF tracks a new index, the Bloomberg Barclays Sterling Liquid Corporate Index – an index Invesco launched in conjunction with Bloomberg Barclays following consultations with AJ Bell’s Passive team. This index takes the standard Bloomberg Barclays UK Corporates Index and applies further screening criteria to try to ensure its underlying bonds are liquid enough to trade.

It was important for us to analyse this new index to make sure its characteristics remain very close to those of the original – that way, the investment outcome should be alike for our investors. We’re comfortable that the yield, credit ratings and the underlying holdings breakdown are very similar. Past performance is no guarantee of future performance, but looking at the five-year backdated data, it is clear that the index offers similar performance and volatility (a measure of daily price variation) to the broader index. In fact, the new index actually shows slightly better returns, with less risk:

Index Name Total Return (%) Volatility (%)
Bloomberg Barclays Sterling Corporate TR Unhedged GBP 28.61 6.04
Bloomberg Barclays Sterling Liquid Corporate Index TR Unhedged GBP 29.31 4.87

Source: AJ Bell, Bloomberg LP - Period 31/12/2014 to 31/12/2019
Validity calculations are based on daily price observations and assume 260 days annualisation basis, per calendar year

In light of this, we’ve now switched to this new holding, which will provide exposure to UK corporate bonds for an OCF that is 50% cheaper. Another benefit is that the new ETF tracks what the team feel is a more efficient UK corporate bond index.

Old Holding Cost
iShares Core GBP Corporate Bond UCITS ETF 0.20%
New Holding Cost
Invesco GBP Corporate Bond UCITS ETF  0.10%

Why we changed our global high yield bonds (£ hedged) holding

Six of our AJ Bell funds are exposed to global high yield bonds: the Cautious, Moderately Cautious, Balanced, Moderately Adventurous and Adventurous funds.

Until November 2019, we used the BMO Global High Yield £ Hedged UCITS ETF to achieve this exposure – an ETF priced at 0.35%. Unfortunately, as we previously announced, BMO decided to close this fund and withdraw from the UK and European ETF market. This meant the team were forced to invest in the only other global high yield sterling-hedged product available to UK investors, the iShares Global High Yield Corporate Bond UCITS ETF, priced at 0.55%.

Faced with the lack of choice and increased cost for this asset class, the team have been busily monitoring the marketplace and engaging with providers to improve the choices available. In April 2020, JP Morgan brought their offering to market – the JP Morgan Global High Yield Corporate Bond Multi-Factor UCITS ETF, priced at 0.35%.

This product tracks the JP Morgan AM Global High Yield Multi-Factor Index, an index that targets high yield bonds. However, this index then applies additional selection criteria, including only bonds that display strong value, quality and momentum characteristics. This means that the new ETF takes something of a hybrid approach. It tracks an index and has no active manager running the strategy, but the index it tracks is designed to replicate the types of investments an active bond manager would make.

We’re comfortable with this approach, believing this style of product is likely to become more widespread in the next evolution of bond ETFs. Past performance is no guarantee of future performance, but in the five-year backdated data the JP Morgan index has shown better returns, with less risk than the iBoxx index tracked by the iShares product:

Index Name Total Return (%) Volatility (%)
JP Morgan AM Global High Yield Multi-Factor TR USD 37.28 0.86
Markit iBoxx Global Developed Liquid High Yield USD Tri-Capped 29.31 1.47

Source: AJ Bell, Bloomberg LP - Period 31/12/2014 to 31/12/2019
Validity calculations are based on daily price observations and assume 260 days annualisation basis, per calendar year

On top of its market-leading price of 0.35% – a 30% saving on the price we pay for our current exposure – we believe this ETF product will attract significant scale into the future. So we’re pleased to confirm that to achieve our global high yield bond exposure, we’ve switched from the higher-priced iShares product to the new JP Morgan ETF.

Old Holding Cost
iShares Global High Yield Corporate Bond UCITS ETF 0.55%
New Holding Cost
JP Morgan Global High Yield Corporate Bond Multi-Factor UCITS ETF 0.35%

Important information: The value of your investments can go down as well as up and you may get back less than you originally invested. These articles are for information purposes only and are not a personal recommendation or advice. If you’re unsure please consult a suitably qualified financial adviser.


ajbell_terry_mcgivern's picture
Written by:
Terry McGivern

Terry is a fund manager in the passive portfolio team at AJ Bell. His career in financial services began in 2005 on the settlements team at a major bank. He later moved to an investment management company and then a leading provider of financial services. In 2010 he took up a proprietary futures trading role at one of the world’s largest independent global commodities brokers. Prior to joining AJ Bell Terry spent five years on the Investment Management Team at a discretionary investment manager in Liverpool, where he was also a member of the Asset Allocation Committee.